As we wrote last week, the most common mistakes that SaaS providers make often involve errors made while balancing the incoming subscription receipts with the need to go out and spend some money to acquire new subscribers.
Dharmesh Shah, CTO and founder of HubSpot, recently blogged his thoughts on a similar topic: the insights he’s gleaned from the B2B SaaS startup. Describing these as “non-obvious SaaS startup lessons,” Shah’s blog post contains a list seven important observations.
You are financing your customers
Most SaaS businesses are subscription-based. If you include a “30-day free trial,” then it will be quite some time before revenue comes in. Cash flow issues arise as a result because while subscription dollars come in over time, sales and marketing costs are incurred at the start. “The higher your sales growth, the larger the gap in cash-flows,” Shah writes. “This is why SaaS companies often raise large amounts of capital.”
Retaining customers is critical
Unlike the ol’ software licensing fee model, you aren’t getting cash up front from customers who download and install your product. Although this model did utilize renewal fees as a way to maintain revenue, under the SaaS model, all revenue is, in Shah’s words, “some sort of recurring revenue.” He suggests you determine your total costs for customer acquisition and your monthly subscription revenue. If the acquisition cost is $1000, for example, and the monthly subscription revenue is $100, then you need to retain a customer for at least 10 months to recover that initial acquisition cost.
It’s software, but there are hard costs
True, you aren’t shipping disks, CDs, and DVDs, but there are still substantial infrastructure costs. “By the time you get a couple of production instances, a QA instance, some S3 storage, perhaps some software load-balancing, and maybe 50% of someone’s time to manage it all (because any one of those things will degrade/fail), you’re talking about real money. Too many non-technical founders hand-wave the infrastructure costs because they think ‘hey we have cloud computing now, we can scale as we need it.’ That’s true, you can scale as you need it, but there are some real dollars just getting the basics up and running.” Shah recommends talking to other SaaS companies who are willing to share some of their data so you can gauge what your hosting costs might be.
It pays to know your funnel
As early as possible, ascertain the shape of your marketing and sales funnel. What drives prospective customers? What is the conversion rate of visitors to your site? “The better you know your funnel the better decisions you will make as to where to invest your limited resources.”
You need knobs and dials in the business
Although there are lots of things you can adjust in the SaaS business – pricing, packaging, features, trial duration for example – it is tempting to adjust too many things at once or adjust things too soon. Shah does caution that experimentations with pricing should always take care of early customers with some sort of grandfathering clause.
Visibility and brakes let you go faster
Because of the shorter operational cycle of SaaS businesses, Shah contends, you are able to identify when “bad things start to happen” more quickly.
User interface and experience counts
A good user interface is crucial to obtain and retain customers, and so design needs to be a key element of your SaaS. “Start recruiting great design and user experience talent now.”
If you’re an SaaS company, what other “lessons learned” would you add to this great list?